Reserve Bank of Australia governor
Glenn Stevens
has signalled he is not prepared to use interest rate cuts to bail out retailers, property speculators, manufacturers and other industries struggling with the resources boom.

In a response to the pressure on the RBA to do more to help businesses and consumers, Mr Stevens said the period of rapidly rising prices for houses, shares and other assets was over.

The Reserve Bank would not use rates to return Australia to the easy-money culture that preceded the global financial crisis.

“The intended effect of our policy actions is certainly not to pump up speculative demand for assets," he said in a speech titled The Glass Half Full in Adelaide.

Mr Stevens’ comments suggest that the pressure created by the two-speed economy is now normal for Australia, with the RBA governor calling for “the right kind of confidence".

Australia’s 3.5 per cent cash rate is one of the highest in the developed world, reflecting Mr Stevens’ determination that rates will not be used to reinflate the sharemarket or property prices.

The central bank cut rates by 0.25 of a percentage point on Tuesday, a smaller cut than many economists expected.

In his speech, Mr Stevens took aim at critics of his approach to monetary policy – a group which includes union leader
Paul Howes
– and said the bank did not have the power to halt structural shifts in the economy, such as the decline of manufacturing and traditional retailing.

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“I’ve sometimes read that interest rates are being set to restrain the mining boom," he said.

For that to be true, rates would have to be “much much much higher".

The Reserve Bank cut rates because inflation had eased as individuals and businesses saved more and spent less, he said.

“Monetary policy has been cognisant of the changed habits of households and the process of balance sheet strengthening, and has been set accordingly," he said.

The speech by Mr Stevens, who said that his job involved “just a little bit of cheer-leading" from time to time, came at the end of a week marked by surprisingly strong data on the economy and labour market.

The governor described the economy’s 4.3 per cent expansion in the first quarter, on an annual basis, as a sign that overall growth was “reasonable" and close to its average pace.

The strong economic figures surprised most economists, given the flatness in consumer sentiment over recent months, particularly after the Reserve Bank cut rates by 0.5 of a percentage point in May, and all are watching to see if this week’s reduction will turn the tide of consumer confidence.

But Mr Stevens said the rate cuts since November were designed to make people feel confident without creating the expectation that property prices would start rising, a situation which could lead to people taking on a lot more debt.

He said the cuts aimed to create the “right kind of confidence".

Encouraging people to borrow more given the “still reasonably high" levels of debt would be risky, he said.

Most analysts said the speech was a clear sign that the Reserve Bank was in no rush to continue cutting rates, as implied by current market pricing for a further 1 percentage point of rate cuts by year’s end.

Mr Stevens said the market was “pricing for a disaster in Europe, which might happen, but it might not".

He also used the wide-ranging speech to argue that many of the complaints about the multi-speed economy came from industries which were being forced to adjust, not just because the resources industry was drawing away labour and capital and pushing up the exchange rate.

“It is doing that, but slower growth in sectors that had earlier done well from unusually strong gains in household spending would have been occurring anyway, even if the mining boom had never come along," he said.

“It is these changes in behaviour by households, in asset markets and in credit demand, that I think lie behind much of the disquiet – dissatisfaction even – that so many seem to have been expressing."

Much of the angst was not triggered by the lack of cash being spread widely from the resources boom, he said.

“It is, instead, the result of other changes that actually have nothing to do with the mining boom per se, but a lot to do with events that occurred largely before the mining boom really began," he said.

For a lengthy period up to 2005, household spending grew faster than incomes, which drove down the nation’s savings rate.

Mr Stevens said the industries which benefited during the credit boom, including retailers, banks, real estate agents and mortgage brokers, were “finding the going much tougher" today.

“For example, the rate of dwelling turnover is about one-third less than it was on average over the previous decade and about half its peak levels," he said.